General Dynamics Corporation and Subsidiaries - Page 7

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               GENDYN/DISC ceased performing as GENDYN’s commission agent             
          on December 31, 1984, and was dissolved on October 23, 1992.                
               On December 27, 1984, GENDYN incorporated petitioner General           
          Dynamics Foreign Sales Corp. (GENDYN/FSC) in the U.S. Virgin                
          Islands to serve as GENDYN’s export sales representative.  GENDYN           
          owned the sole class of voting stock and entered into a Foreign             
          Sales Commission Agreement with GENDYN/FSC.  On March 22, 1985,             
          GENDYN/FSC elected under section 927(f) to be treated as a                  
          foreign sales corporation (FSC).  During 1985 and 1986,                     
          GENDYN/FSC functioned as GENDYN’s export sales representative and           
          was involved in no other trade or business.  GENDYN/FSC filed               
          Federal Forms 1120-FSC and used the completed contract method of            
          accounting to report the commissions earned on GENDYN’s sales of            
          export property involving long-term contracts.                              
               At the end of each year, commissions on export property                
          sales involving long-term contracts were deducted by GENDYN and             
          included in income by GENDYN/FSC in its appropriate taxable                 
          period.  With rare exceptions, the 23-percent combined taxable              
          income method (23-percent method) was used because it produced              
          the largest commission.  In a few instances, the 1.83-percent               
          gross receipts method was used.                                             
               Petitioners computed combined taxable income for each long-            
          term contract under the 23-percent method as follows:                       
               (a)  Add:  gross receipts from the contract as determined              
          under the completed contract method of accounting;                          

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